Andrey Kovalev Talking About Changes in the Russian Economy and its Impact on the Banking System

Posted by Kathy Colace, Community Contributor

Posted by Kathy Colace, Community Contributor

Posted by Kathy Colace, Community Contributor

The massive changes occurring in the Russian economy have an impact the banking sector. Since 2015, there is a clear trend towards putting foreign players out of business.Today we publish the expert opinion of a banker who has built a unique 21st century commercial bank in harsh environment for business in Russia - Andrey Kovalev.

It may sound surprising, but many Russian banks are more technologically advanced than most banks in the USA, and provide a decent customer service. On the first aspect, it's simple - US banks are financial institutions with a great history, and their infrastructure was created at the dawn of the IT industry. Yes, banks in the United States are constantly being modernized and introduce many new features, especially in the area of customer service for individuals and the corporate sector, but the back office can still use outdated software and databases. The Russian banking system is essentially new and the development of IT in the banking sector has progressed in the last 10-12 years, in an era of rapid development of the IT industry around the world. For example, the leading project of the largest Russian automated banking systems supplier can provide an exceptional level of business processes automation in a single software product, which is quite rare among US and European banks. Unfortunately, in the case of the customer service, the situation is much worse. Only some representatives of the banking sector in Russia can provide service at the level of the world's best financial institutions, and therefore, foreign bank branches in Russia have earned loyalty of an extensive customer base in a short time.For a long time, the branches of foreign banks competed with state-owned banks; they were the ones who could offer cheap mortgages, fast consumer loans, and advantageous credit cards. One of the main strengths of a foreign bank branches was cheap (relative to the Russian domestic market) funding from parent structures from Europe and the USA. It was a common situation when the branches of foreign banks offered loan interest rates even lower than those of state banks.But in recent years, the structure of their business in the Russian market has begun to change, although the foreign banks branches still provide better service compared to Russian banks.Currently, there are 23 state-owned banks operating in Russia. Yes, the "covers" are different, the colors and branding may vary, but this does not change the essence. This makes the customers think that they have a choice when in fact they don't. Russian banks under sanctions literally become "black boxes" because The Central Bank of the Russian Federation allowed them not to make their reporting public. And how can one assess the financial condition of these credit institutions? How can an average customer choose one or another bank?State banks account for over 70 percent of the entire market and take away clients from both private banks, the number of which is rapidly declining, and from branches of foreign banks. Over the past 10 years since 2008, the number of credit institutions has decreased from 1136 to 499. If we talk only about foreign bank branches that are in the TOP-30 banks in the territory of the Russian Federation, the share of their assets was 6.1% in 2008, 4.6% in 2012, and this figure dropped to 3.8% by 2017.I would highlight the following factors leading to a reduction in the client base of foreign bank branches:- sanctions - many Western businesses, for projects with which most of the foreign banks offshoots were opened, close down their business in Russia and, accordingly, banks lose customers;- dedollarization - currency funding affected by the volatility of the ruble exchange rate makes a foreign currency lending impossible;- unspoken rule - all strategic companies in the country should work with the state-owned banks.As a result, it turns out that the foreign capital market is of interest only to first-tier companies seeking to raise large syndicated loans. This does not require the presence of a separate foreign bank branch in Russia.Therefore, after analyzing the work of foreign bank branches, it becomes clear why neither the Government nor the Central Bank is not interested in their presence in the Russian banking market so far. And if they are not interested, it means that there are no forces in the government structures to defend the interests of the foreign bank branches. At the same time, there are plenty of people willing to redistribute the market for even more monopolization, and therefore, my expectation is that in the near future we should expect the Central Bank to introduce a standard for placement of temporarily disposable monetary resources in the parent banks by foreign banks in the Russian Federation in the amount of 20% from capital (this proposal is already under consideration). On December 10 of this year, a draft law was introduced in the State Duma that tightens the rules for the operation of international payment systems in Russia. This means that in the near future they will be allowed to work only through a separate division registered in the territory of the Russian Federation under the control of the Central Bank.And no matter what they say about wanting to attract private and foreign capital to the banking sector, the actions prove the opposite - everything is being done to reduce the share of both private and foreign capital and to make it ever more government-controlled.